What is the difference between a bonus share and a dividend share in terms of share distribution?
Shareholders often encounter terms like bonus shares and dividend shares in the context of share distribution. While both play a role in distributing rewards to shareholders, they are distinct concepts. Let’s explore the difference between bonus shares and dividend shares.
Bonus Shares
Bonus shares, also known as scrip dividends, are additional shares that a company issues to its existing shareholders as a bonus. These shares are given free of cost, and the aim is to increase the number of shares held by each shareholder without affecting their proportional ownership. Companies typically issue bonus shares to reward shareholders while preserving the cash reserves.
Dividend Shares
Dividend shares, commonly referred to as cash dividends, are payments made by a company to its shareholders as a share of the company’s profits. These dividends are usually paid in cash and are proportional to the number of shares held by each shareholder. The purpose of dividend shares is to distribute the company’s profits to the shareholders in the form of cash.
Key Differences
The main difference between bonus shares and dividend shares lies in their nature and purpose:
Bonus Shares:
- Issued to existing shareholders as a bonus
- Given free of cost
- Aim to increase the number of shares held by each shareholder
- Don’t impact proportional ownership
- Preserve company’s cash reserves
Dividend Shares:
- Paid in cash to shareholders
- Proportional to the number of shares held
- Distribute company’s profits
- Provide immediate cash returns to shareholders
Benefits of Bonus and Dividend Shares
Both bonus shares and dividend shares have their advantages for shareholders:
Bonus shares:
- Increase the number of shares held, potentially enhancing wealth if the share price appreciates
- No immediate tax liability as no cash is received
Dividend shares:
- Immediate cash returns to shareholders
- Provide a regular income stream
- Can be reinvested or used for personal expenses